Substantial Employee Retention Tax Credits Remain At Large
November 4, 2022
In response to the pandemic, the Employee Retention Credit (ERC) was created under the CARES Act in March 2020. The ERC is a refundable payroll tax credit that in its two years of existence has yielded large tax refunds for many business owners of all sizes in various industries. While the credits are specifically for tax years 2020 and 2021, there is still time to request refund claims for these years. Below is a comprehensive summary of how to qualify for the credit in both years, along with a summary of the potential refunds that the ERC could potentially yield.
Availability of the ERC
- Available to business owners that employ less than 100 employees. The employees of all affiliated companies with common ownership must be treated as a single employer for purposes of determining if there are 100 or more employees.
- Wages paid between March 13, 2020, and December 31, 2020, are potentially eligible for the ERC.
- Available to business owners that employ less than 500 employees. The employees of all affiliated companies with common ownership must be treated as a single employer for purposes of determining if there are 500 or more employees.
- Wages paid between January 1, 2021, and September 30, 2021, are potentially eligible for the ERC.
Qualifying for the ERC: decline in revenue
Most business owners that obtained the ERC in 2020 and 2021 have done it by way of demonstrating a significant revenue decline. To qualify for the ERC as a result of a significant revenue decline, the following must be demonstrated respectively in 2020 and 2021:
- A 50% or more decline in gross revenue in one quarter of 2020 compared to that same quarter in 2019.
- Employer must later determine if there is a later calendar quarter in 2020 which the quarterly gross receipts are greater than 80% of their gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.
- A 20% or more decline in gross revenue in one quarter of 2021 compared to that same quarter in 2019.
- If an employer can’t satisfy the gross receipts test in a specific quarter of 2021, they can elect to compare the gross receipts of a prior quarter to that same quarter in 2019 to determine if there was a decline in gross revenue of at least 20% (e.g., qualify for the ERC for the first quarter of 2021 if gross revenue in the fourth quarter of 2020 is down at least 20% compared to the fourth quarter of 2019).
Qualifying for the ERC: suspension of operations
Business owners that don’t qualify for the ERC under the significant revenue decline test could claim the ERC on wages paid out during a period in which the business operations experienced a full or partial suspension of operations due to COVID-19. To qualify for the ERC under suspension of operations, the following items would need to be met:
- The full or partial suspension operations must be the result of a government order.
- The gross receipts from the portion of the business that has been suspended must make up at least 10% of the employer’s total gross receipts.
Value of the credits
- Equal to 50% of wages paid to each employee up to a maximum of $10,000 in wages per employee per year.
- Credit is equal to 70% of wages paid to each employee per quarter up to a maximum of $10,000 in wages per quarter.
Other important information
- The ERC is also available for nonprofit organizations.
- Employers can claim both the ERC and the Paycheck Protection Program (PPP) loan as long as the PPP funds aren’t used to fund the same wages that are allocated towards the ERC.
- If the ERC was not claimed on the originally filed quarterly employment tax returns (Form 941), employers can still claim the ERC by filing an amended quarterly employment tax return (Form 941X).
- When measuring the eligibility for the ERC as the result of a significant revenue decline, the gross revenue decline must be measured using the same accounting method that a business owner or an organization uses on their annual income tax return filing.
- Wages paid to more than 50% owners or individuals that are related to the more than 50% owners are ineligible for the ERC.
- Employers have three years from the original filing due date of Form 941 to claim a refund for the ERC (e.g., Form 941 for the first quarter of 2021 was originally due April 30, 2021; employers have until April 30, 2024, to file a refund claim).
- Business owners that claim the ERC must reduce the deductible wages on their corporate or pass-through entity tax returns equal to the value of the credits in the year the ERC is incurred (regardless of when the ERC funds are received).
- Businesses or organizations that began operations after the pandemic may qualify for the ERC as a Recovery Startup Business.
Business owners and nonprofit organizations should consult with their tax accountants to determine their eligibility for the ERC.
Contact Aprio’s ERC Services team today to connect with an experienced advisor.